Tuesday, 16 December 2014

Should the West soften stance on Russia?

Economics, it seems, is rarely top politicians' forte, evidently as much for what they do and don't do to promote  their countries, and arguably nowhere is this more obvious when politics is allowed to trump economics as in the current case of unpleasantness no afflicting the Ukraine. It is a sine qua non, or at least desirable, that the majority of people's wishes should take priority over the minority, provided the minority is not unduly disadvantaged, which is what happened when the Crimea overwhelmingly voted to prefer Russian enosis to closer EU relationships. The West voted the armed Russian help in this split as unlawful, apparently overlooking the illegal putsch in the Ukraine that sparked the brouhaha, but one wonders what they would have thought had, for example, the peoples of the Falklands and Gibraltar overwhelmingly voted for union with Argentina and Spain respectively without deference to Whitehall. Moreover, had Scotland decided to vote for independence without the UK's blessing and won would the West have viewed Britain's subsequent armed intervention as unlawful? To its credit Britain has agreed that if there were a majority vote in the Falklands and Gibraltar to join their former territorial owners Britain would not stand in their way, which is as it should be.

The West has now resigned itself to Crimea's secession from the Ukraine but could its resistance to any further secession from the Ukraine by the small, largely Russian-speaking eastern provinces be dangerously over reacting, given the obvious economic and political risks it poses to Russia, the EU and the wider world? It seems so.

It is to be hoped that the Ukraine will not see more lost territory from the east, because together they will be stronger and more prosperous but to achieve that desirable outcome both Russia and the West much be more accommodating. Russia, for its part, should withdraw all its overt and covert forces from the Russian-speaking eastern provinces in return for the Ukraine guaranteeing, with the UN, that there will be no reprisals and oppression of the ethnic Russians that could leave them oppressed. Both sides should also contribute to reconstruction costs with adequate outside loan help. The EU must also be wary over allowing closer ties with the Ukraine before that country has cleaned out its Augean stables of corruption, cronyism, debt welching and colossal economic mismanagement, which now sees the country in an unholy economic mess. It would also be sensible for the Ukraine to maintain good relations with both Russia and the EU and purge itself of fascist tendencies that are still evident in parts of the Ukraine's political establishment, in particular.

Russia, too, needs some stable cleaning in economic affairs. The West's sanctions are now beginning to bite seriously as Russia's economy moves into recession, prices rise, the Rouble plunges and unemployment worsens.Opinion polls may show that President Putin is still popular but rumbling bellies could soon change that. The falling oil price, however, will do even more harm than sanctions. About half of Russia's revenues derive from oil and gas and for every dollar fall in the global oil price Russia loses US$2 billion  a year if the fall is sustained. Now languishing at $60 a barrel from a multi-year average of $100, estimated oil revenue losses are $90 billion to $100 billion compared with only $40 billion from sanctions so far. It is not too fanciful to believe that oil will fall to below $50. What this exposes is the inherent weakness in Russia's economic management. Other than armaments, it produces very little manufactured goods and not enough agricultural output and the billions of dollars it earned when oil prices were high have been unwisely spent on multi-billion dollar fripperies like the Sochi Winter Olympics, instead of diversifying the economy.

Mickhail Fradkov, head of Russia's foreign intelligence service, has accused America of introducing sanctions and attacking the Rouble through manipulation of oil prices in order to oust Putin. On sanctions he has a point, but the oil price has always been volatile, despite the best efforts of the OPEC cartel. "No one wants to see a strong and independent Russia," he said. This, of course, is patent garbage, for anyone with the most basic grasp of elementary economics would know that the world has a strong interest in seeing Russia prosper, because the wider world would also benefit through more trade and trade is the handmaiden of prosperity and prosperity the surest guarantor of peace.

Fradkov's remarks may go down well with ordinary Russians but they are, nevertheless, potentially inflammatory and dangerous because a populace not grounded in elementary economics is unlikely to see through the crass vapourings of political mountebanks and toadies. This is just one, but critical example, why economics should be taught at all schools.

For Russia the pain can only get worse as the oil price continues to tumble, ramping up the risks of political instability. Reforming and rebalancing its economy to favour much more manufacturing is an urgent necessity to give the people what they really want, which is not, as in the days of ancient Rome, more costly games like the World Football cup matches in 2018. NATO and the West, for their part, should not make provocative moves on Russia's borders and the EU and global lenders of last resort should realize the economic lessons from the 1930s. When economies are placed under extreme pressure through sanctions and other circumstances events like the unrealistic war reparations imposed by the victors of Versailles on Germany, leading to the collapse of the Wiemar Republic and its hellish aftermath, could resurface in another devilish form.

The Western democracies have long cherished their desire to see democracy planted in Russia, just as at one time Russia tried to export its political ideologies to the World, almost to the point of sparking World War 3. Russia has given up on that path and the West should follow suite. Democracy will come to Russia as sure as day follows night but it must never be by outside interference.